Industry Spotlight: Buying a Manufacturing Company - Acquira

Industry Spotlight: Buying a Manufacturing Company

What You’ll Learn
  • Why you need to buy a manufacturing company now
  • How to find the most profitable manufacturing company to acquire
  • How to choose between international and domestic manufacturing
  • The unique success winners in running a manufacturing business
  • What to look out for during the acquisition transaction to make great deals

Introduction

Today, the biggest attraction in business acquisition is usually tech companies. But there’s a much more stable and longstanding benefit in buying a manufacturing company — especially during such a booming time as this.

In this article, we dive into the best things about owning a manufacturing business and how you can dive into that sector and maximize your returns.

Why Should You Buy a Manufacturing Company?

Despite tech innovations causing disruptions in most developed countries and worldwide, manufacturing businesses are still the anchor of most economies. 11.39% of the American economy is driven by the manufacturing industries, and it employs over 8.51% of the country’s workforce.  

The USA is the world’s second-largest manufacturer, and the industry is expected to grow in the future too. According to World Economic Forum, the USA stood second for competitiveness in productivity. The country’s manufacturing industry is third in production, exports, technology implementation, and updating industry standards.

These facts show the solid potential for the manufacturing industry to not only remain relevant in the future economy but to bring in significant returns for owners.

Besides the global value of the American manufacturing industry, there are many benefits of buying a manufacturing company.

Benefits of Owning a Manufacturing Business

Owning a manufacturing business comes with some perks you can’t ignore. Not only will you escape the huge capital barrier in getting into the business, but you also tap into an industry that is currently experiencing a boom.

Let’s dive into it.

The industry is booming

The American economy was widely disturbed by the mortgage crisis of 2008. The manufacturing industry was also hit hard, but it soon set itself on the path of sustainable growth. It was growing, but when COVID-19 came, it negatively impacted manufacturing production by 16.3%.

But it didn’t stop there. Recovery started in May 2020. By May 2021, there was evidence that the industry experienced an 18.30% year-on-year growth.

The trend is expected to replicate itself with a 5.9% growth by the end of 2021.With the right leadership and strategy, investing in acquiring a manufacturing business is almost a certain assurance you’ll get ROI in the first year. You can grow and maintain a sustainable income and help keep many jobs alive.

“Manufacturing production in the United States increased 18.30% year-on-year in May of 2021, following a 22.7 percent rise in April” (Source: Trading Economics)

At the cutting edge of innovation

From the first industrial revolution of the modern world to the introduction of Big Data, IoT, and Robotics, the manufacturing industry has always been the focus. Almost every technological advancement has had implications for the manufacturing industry. 

Many people argue about the decline of manufacturing industry jobs, but the truth is that industrial processes have become streamlined with more automation. It needs people not to work like a machine. Instead, people are required to operate machines. 

Undoubtedly, big data and IoT are driving the manufacturing industry towards a new era of modernization.

As a technology-oriented manufacturing company owner, you have the opportunity to drive innovations and be at the forefront of industry leadership.

What’s even more exciting is that you can benefit from new technologies to create wider profit margins with higher yields and better product quality.

Innovation and new technology have also led to better safety compliance, and now…

Manufacturing businesses are safer than they used to be

The manufacturing industry has undoubtedly fought a long battle to stay compliant with safety standards. From machine guarding to falls and electrical hazards to chemicals, manufacturing businesses’ workers were exposed to numerous safety hazards.

Again, thanks to innovation and technology in the industry, manufacturing business owners can maintain more sustainable manufacturing practices.

And due to the efforts of industry owners to ensure compliance with OSHA’s standards, the number of incidents and work injuries decreased from 10.9 incidents per 100 workers in 1972 to 2.8 incidents per 100 workers in 2017.

Therefore, let’s break the myth of safety hazards in the manufacturing industry that stops you from considering the industry for investment.

Working smarter is the new norm for the industry and it has helped to overcome numerous health and safety concerns. The millennial workforce joining the industry is compliant with the safety standards as well.

There’s low demand in acquiring manufacturing companies

Did you know that there are 2.34 million small businesses in the USA owned by baby boomers? Wilmington Trust report stated there’s no succession or transition plan by 58% of the small business owners.

What adds more fuel to the situation is most of the heirs of these baby boomers don’t want to continue family business or want to start their own. 

Now, the situation is that the baby boomers are about to retire, and they want someone to take over the business. A vast majority want retirement by a business sale.

On the other hand, 72% of millennials feel founding a startup is the best option to innovate and create employment. 

Who will buy the business from the baby boomers? 

There are fewer buyers and more sellers. And you are already familiar with the phenomenon of market demand and supply. When supply exceeds demand, the market adjusts itself at a lower price.

When it can cost you millions to start your own company, why not buy a manufacturing company from baby boomers at a lower price? Once owned, you can initiate a change at whatever level you want.

Let me state a bonus fact for you to think about when acquiring a manufacturing company:

A report by Refinitiv stated that global mergers and acquisitions witnessed the lowest value of only $729 billion in 2019 since 2016. Most private equity buyers and institutions are waiting for a clearer picture till the end of 2021 or 2022. Meanwhile, there is a large number of baby boomers looking to retire via business sales.It is the right time. You know what you need to do.

Types of Manufacturing Companies to Buy

If you’re thinking of seizing the opportunity to acquire a manufacturing company, then you should know this:

Do your market research to find the products with long customer retention and fall in the category of essentials. For instance, if you go to accessories, the name suggests that any economic downturn will show up its impact in this sector.

So, ideally, your manufacturing business investment should be focused on the product value a manufacturing business is offering.

The most common example of manufacturing companies that stay unimpacted by any economic factors are:

  • Food industry 
  • Apparel & Textile 
  • Medical supplies
  • Pharmaceuticals
  • Electronics & Home appliances 
  • Sports equipment
  • Grocery items  
  • And even some beauty products

Did you know that consumer staples, grocery items, and cosmetics are considered recession-resistant industries. This information is supported by the figures of Dow Jones Indices for April 2021, stating an 8.20% return on the consumer staple sector.

Domestic or International Manufacturing Business?

Now you must be thinking about buying a domestic manufacturing company or an international acquisition. 

The decision of buying an international manufacturing company or a domestic one depends on your own priority. The culture of offshore manufacturing has increased over the last few years due to cheap manufacturing costs, variety, and many other benefits.  

Each choice has its own benefits and downsides. You can choose one, considering which business model suits your vision and goals. 

Offshore/International benefits:

  • Cost reduction 
  • There is greater variability in manufacturing offshore with good quality and deep margins
  • Low labor and overhead costs
  • You can focus more on products R & D

However, the pros of domestic manufacturing are:

  • Just-in-time production with shorter lead times
  • More flexibility 
  • The shipping times and costs are negligible 
  • If you have a patented product, it is impossible to replicate it

Although the concept of a global village has made the concern of domestic or offshore less important.

But you must consider your business’s supply chain, supplier relationships, lead times if suppliers are international, etc. Because these factors have a huge impact on your business operations.

How to Spot the Right Manufacturing Company to Buy

When you are buying a business, you need to observe, analyze, and then decide. This golden rule applies to the acquisition of any business irrespective of industry or sector. 

What are the qualities you must look for to find the right manufacturing company for acquisition?

Numbers

Whenever going for an acquisition, the financials of the company are important. You cannot rely on the public financial statements or take the word of what surroundings say about the company.

Thoroughly check the financials, tax returns, and internal finances to know the company’s conduct you’re considering buying. 

Product value 

We already talked about buying a manufacturing company that’s product value is recession-resistant. A good manufacturing company to buy will be one having the product lying in consumer staples or a niche where the product is valued highly by the customers.

This factor can also correlate to the product value associated with the brand name. 

What is the product life cycle, and where does the product sit right now? 

Buying a product that has lived its boom and earning period and is on the verge of extinction is not a profitable purchase. 

The USP (Unique Selling Point)

A unique selling point signifies how the company has positioned itself in the industry and customers. What are the distinctive features of products or services, competitive edge, etc., that the company leverages to earn profit? 

If the manufacturing company you are considering buying has a unique product that is patented, you can capitalize on it to make a remarkable success in the future. 

Customer base

Who are the customers? How large is the customer base? 

How do they identify the company or product?

These are some questions you need to answer for deciding if a manufacturing company is great to buy or not. The size of the customer base, customer retention, and customer loyalty will decide if you will be able to make a profit from the company in the future or not. 

Your search for a perfect company to buy won’t end here. When analyzing different businesses for purchase, you will discover many other factors like suppliers’ networks, vision, mission, legal disputes, etc. Keep in mind that the most important factors to analyze if a company is a great buy are the ones discussed earlier.

Key Takeaway

Buying a manufacturing company can be a profitable acquisition like any technology-based business. Traditional businesses like manufacturing companies are more reliable, long-lived, and adaptable.

Acquiring a high-tech startup might require you to be tech-savvy by yourself. However, having a little know-how is required to be the leader of a manufacturing company. 

The right time is now and you can get started now. Not sure you have the know-how to take on business acquisition? Don’t worry. We prepared a smooth transition for you here.

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